On October 13, 2008, a systemic risk determination was invoked by
the Secretary of the Treasury (in consultation with the President)
following recommendation of the Boards of the FDIC and the Federal
Reserve. A systemic risk finding is invoked when it is determined that
the failure of an institution or institutions could threaten the stability
of the entire financial system. In response to this finding, the FDIC
implemented the Temporary Liquidity Guarantee Program (TLGP) as part
of a larger government effort to strengthen confidence and encourage
liquidity in the nation’s banking system. For participating entities,
the program provides guarantees for certain senior unsecured debt of
insured depository institutions and certain holding companies; and
provides unlimited coverage for noninterest-bearing transaction accounts
held by insured depository institutions through December 31, 2009.
The TLGP Final Rule was issued on Friday, November 21, 2008.

II. Investments

The DIF investment portfolio’s amortized cost (book value)
decreased significantly by $18.8 billion during the first nine months of
2008, and totaled $31.7 billion on September 30, 2008. The decline was
primarily the result of funding failed institution resolutions during the
first nine months of 2008. At quarter end, the DIF investment portfolio
yield was 4.71 percent, almost equal to its December 31, 2007, yield of
4.72 percent. While substantial amounts of Treasury Inflation-Protected
Securities (TIPS) and longer-duration conventional Treasury securities
were sold during the third quarter of 2008, the portfolio’s relatively
stable yield reflects, in part, the fact that the DIF portfolio’s
securities have generally similar yields across maturity sectors. At quarter
end, the DIF portfolio had only $851.2 million in overnight investments,
down dramatically from its second quarter ending balance of $9.3 billion.
Resolution-related outlays prompted drawing down the overnight investment
balance prior to liquidating securities. In fact, this somewhat high $851.2
million overnight investment was because the DIF received $618.6 million
in assessments on September 30, 2008.

Conventional Treasury market yields declined dramatically
during the third quarter of 2008 as the deepening economic crisis
and financial market turmoil prompted a flight to quality with burgeoning
investor demand for Treasury securities. The yield declines also reflected
growing consensus expectations for additional federal funds target
rate cuts. Not surprisingly, the yield declines on intermediate- to
longer-maturity Treasury security yields were less dramatic than those
of shorter-maturity securities. During the fourth quarter of 2008,
Treasury yields are expected to continue to be volatile as market
participants gauge whether financial and economic market turmoil is
subsiding, prompting Treasury prices to fall; or whether financial
and economic market turmoil is deepening, prompting further flight-to-quality
Treasury price rallies.

III. Budget

Approximately $759 million was spent in the Ongoing Operations
component of the 2008 Corporate Operating Budget, which was $32 million
(4 percent) below the budget for the nine months ending September 30,
2008. The Outside Services - Personnel expense category was approximately
$21 million below its year-to-date budget, and the Salaries and Compensation
category was $9 million below its year-to-date budget. Together, these
two categories represented 91 percent of the total Ongoing Operations
variance.

Approximately $74 million was spent in the Receivership
Funding component of the 2008 Corporate Operating Budget, which was
$0.3 million (0.5 percent) less than the budget for the nine months
ending September 30, 2008. Spending during the third quarter was
significantly more than in the first two quarters as resolutions
and receivership activities occurred at a greater pace than during
the first half of the year. In September, the Board approved an increase
in the Receivership Funding budget component from $75 million to
$150 million. If the growth in the resolutions and receivership management
workload continues at its current pace, the budget requirement for
2009 will be much higher.

Authorized staffing has increased 17 percent from 4,810
at the beginning of the year to 5,621 as of September 30, 2008, due
to the increase in resolutions and receivership management activity
and the elevated examination workload. The majority of the authorized
staffing increase is for hiring non-permanent employees. This trend
is also likely to continue into the 2009 budget year.